Are People Ditching Banks and Going Online for Loans?

In the past, if you needed a loan for your car, home improvements or to consolidate your credit cards, you would need to get dressed up and head down to the bank to beg for money. The Internet has made things a little easier.
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In the past, if you needed a loan for your car, home improvements or to consolidate your credit cards, you would need to get dressed up and head down to the bank to beg for money. The Internet has made things a little easier. Online personal loans are now available to make the hassle of getting a loan a little easier, and peer-to-peer online personal loans services are even changing the way that people lend and borrow money.

The popularity of online loans has been rampant, with online loan services providing billions of dollars in loans, mostly due to the convenience factor, but also the unusual way that some of the services are structured. Peer-to-peer online personal loan sites take advantage of the crowd-funding boom to allow everyday people to invest their money in others' debt. Borrowers post their desired loan amounts and individual investors can then fund a portion or all of the loan amount and collect on the interest accrued from the loan.

This allows for everyday people to make money on loans, but what are the benefits for those applying for loans?

Why do people choose online personal loans?

You would think people would be more inclined to trust the banks instead of an online lending service. So why are so many people putting their trust in online loans? There are a couple of major reasons:

Convenience: One of the main reasons people are flocking to online loans is the convenience. You easily apply for a personal loan from the comfort of your own home. Just fill out the online form and get approved quickly. All of your dealings with your lender happen exclusively online, which makes it convenient for those who don't want to make the extra trips to the bank.

Lower rates: Since online lenders don't have the added expense of physical offices scattered throughout the country, they can offer lower rates and fees to lenders. The interest rates are also fixed, so you don't have to worry about fluctuating interest rates through the life of your loan. The only thing to remember is that most online personal loans are unsecured, which means that you don't need to put up collateral in order to get approved for the loan. While this is convenient, it can mean higher interest rates since these loans are a bigger risk to the lender.

Easier access: Banks are notoriously picky when it comes to who they lend money to. Online personal loan services are not as picky, meaning that it can often be easier to get approved for a loan online, if you have the right credit score. Peer-to-peer lending sites like Prosper and Lending Club actually pitch out loans to individual investors, so if they are willing to take on your debt, you can get approved even with a lower credit score.

Partial loans: Unlike banks who require you to be approved for the entire loan, many peer-to-peer online lending services will allow you to take your loan even if only 60-70 percent of it is funded by individual investors. (Individual investors can bid on a part of your loan or the full amount, meaning that portions of your loan can be funded by a number of individuals.) It's nice to know that even if you can't get approved for the entire loan, you still have the possibility of getting approved for a portion of it.

Who offers online personal loans?

Best for those with Good to Excellent Credit: Prosper

Although not the most popular lending company, Prosper is making waves in the online lending community. It just raised $70 million from investors in May. Prosper is a little more picky about who they lend to, since you need either good or excellent credit to be approved for a loan. Loan amounts range between $5,000 and $35,000 and can be paid back between 36 and 60 months, depending on what you are approved for.

Best for those with Average Credit: Lending Club

Lending Club is the most popular of the online lending services and has been so successful, it just filed the paperwork to go public. Lending Club allows loans as low as $1,000 and as much as $35,000. Lenders with credit from average to excellent can be approved, although loans are not guaranteed. Loan terms range from 36 months to 60 months. This is a good comparison of Prosper and Lending Club as well as a review of UpStart, another great loan option.

Best for Small Businesses: Kabbage

Need a small business loan? Kabbage is the best bet for you. They only deal with lending for small businesses. They also have a great and interesting way of dealing with small business loans. You are approved for lines of credit up to $100,000 based on a variety of factors, which includes linking your financial accounts, like your business checking account, Square, eBay, Amazon or other online accounts, to your application. Then, you can borrow against your credit limit and repay those smaller loans within 6 months, with as little as 1 percent interest. Here is a good breakdown on how Kabbage works and how to get approved.

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